Chapter 2—Consolidated Statements: Date of Acquisition Key
1. An investor receives dividends from its investee and records those dividends as dividend income because:
2. An investor prepares a single set of financial statements which encompasses the financial results for both it
and its investee because:
3. An investor records its share of its investee’s income as a separate source of income because:
4.
Account
Investor
Investee
Sales
$500,000
$300,000
Cost of Goods Sold
230,000
170,000
Gross Profit
$270,000
$130,000
Selling & Admin. Expenses
120,000
100,000
Net Income
$150,000
$ 30,000
Dividends paid
50,000
10,000
Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net Income for the Controlling Interest?
5. Consolidated financial statements are designed to provide:
6. Which of the following statements about consolidation is not true?
7. Consolidated financial statements are appropriate even without a majority ownership if which of the
following exists:
8. Consolidation might not be appropriate even when the majority owner has control if:
9. Which of the following is true of the consolidation process?
10. In an asset acquisition:
11. Which of the following is not true of the consolidation process for a stock acquisition?
12. A subsidiary was acquired for cash in a business combination on December 31, 20X1. The purchase price
exceeded the fair value of identifiable net assets. The acquired company owned equipment with a fair value in
excess of the book value as of the date of the combination. A consolidated balance sheet prepared on December
31, 20X1, would
13. Parr Company purchased 100% of the voting common stock of Super Company for $2,000,000. There are
no liabilities. The following book and fair values pertaining to Super Company are available:
Book Value
Fair Value
Current assets
$300,000
$600,000
Land and building
600,000
900,000
Machinery
500,000
600,000
Goodwill
100,000
?
The amount of machinery that will be included in on the consolidated balance sheet is:
14. Pagach Company purchased 100% of the voting common stock of Rage Company for $1,800,000. The
following book and fair values are available:
Book Value
Fair Value
Current assets
$150,000
$300,000
Land and building
280,000
280,000
Machinery
400,000
700,000
Bonds payable
(300,000)
(250,000)
Goodwill
150,000
?
The bonds payable will appear on the consolidated balance sheet
15. Which of the following is not an advantage of the parent issuing shares of stock in exchange for the
subsidiary common shares being acquired?
16. When it purchased Sutton, Inc. on January 1, 20X1, Pavin Corporation issued 500,000 shares of its $5 par
voting common stock. On that date the fair value of those shares totaled $4,200,000. Related to the acquisition,
Pavin had payments to the attorneys and accountants of $200,000, and stock issuance fees of $100,000.
Immediately prior to the purchase, the equity sections of the two firms appeared as follows:
Pavin
Sutton
Common stock
$ 4,000,000
$ 700,000
Paid-in capital in excess of par
7,500,000
900,000
Retained earnings
5,500,000
500,000
Total
$17,000,000
$2,100,000
Immediately after the purchase, the consolidated balance sheet should report paid-in capital in excess of par of
17. Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1 par value
stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs.
Prior to the transaction, the companies have the following balance sheets:
Assets
Pinehollow
Stonebriar
Cash
$ 150,000
$ 50,000
Accounts receivable
500,000
350,000
Inventory
900,000
600,000
Property, plant, and equipment (net)
1,850,000
900,000
Total assets
$3,400,000
$1,900,000
Liabilities and Stockholders’ Equity
Current liabilities
$ 300,000
$ 100,000
Bonds payable
1,000,000
600,000
Common stock ($1 par)
300,000
100,000
Paid-in capital in excess of par
800,000
900,000
Retained earnings
1,000,000
200,000
Total liabilities and equity
$3,400,000
$1,900,000
The fair values of Stonebriar’s inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. The journal entry to record
the purchase of Stonebriar would include a
18. When it purchased Sutton, Inc. on January 1, 20X1, Pavin Corporation issued 500,000 shares of its $5 par
voting common stock. On that date the fair value of those shares totaled $4,200,000. Related to the acquisition,
Pavin had payments to the attorneys and accountants of $200,000, and stock issuance fees of $100,000.
Immediately prior to the purchase, the equity sections of the two firms appeared as follows:
Pavin
Sutton
Common stock
$ 4,000,000
$ 700,000
Paid-in capital in excess of par
7,500,000
900,000
Retained earnings
5,500,000
500,000
Total
$17,000,000
$2,100,000
Immediately after the purchase, the consolidated balance sheet should report retained earnings of:
19. Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1 par value
stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs.
Prior to the transaction, the companies have the following balance sheets:
Assets
Pinehollow
Stonebriar
Cash
$ 150,000
$ 50,000
Accounts receivable
500,000
350,000
Inventory
900,000
600,000
Property, plant, and equipment (net)
1,850,000
900,000
Total assets
$3,400,000
$1,900,000
Liabilities and Stockholders’ Equity
Current liabilities
$ 300,000
$ 100,000
Bonds payable
1,000,000
600,000
Common stock ($1 par)
300,000
100,000
Paid-in capital in excess of par
800,000
900,000
Retained earnings
1,000,000
200,000
Total liabilities and equity
$3,400,000
$1,900,000
The fair values of Stonebriar’s inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. What is the amount of
goodwill that will be included in the consolidated balance sheet immediately following the acquisition?
20. On April 1, 20X1, Paape Company paid $950,000 for all the issued and outstanding stock of Simon
Corporation. The recorded assets and liabilities of the Simon Corporation on April 1, 20X1, follow:
Cash
$ 80,000
Inventory
240,000
Property and equipment (net of accumulated depreciation of $320,000)
480,000
Liabilities
(180,000)
On April 1, 20X1, it was determined that the inventory of Simon had a fair value of $190,000, and the property and equipment (net) had a fair value
of $560,000. What is the amount of goodwill resulting from the business combination?
21. On April 1, 20X1, Paape Company paid $950,000 for all the issued and outstanding stock of Simon
Corporation. The recorded assets and liabilities of the Simon Corporation on April 1, 20X1, follow:
Cash
$ 80,000
Inventory
240,000
Property and equipment (net of accumulated depreciation of $320,000)
480,000
Liabilities
(180,000)
On April 1, 20X1, it was determined that the inventory of Simon had a fair value of $190,000, and the property and equipment (net) had a fair value
of $560,000. The entry to distribute the excess of fair value over book value will include:
22. On June 30, 20X1, Naeder Corporation purchased for cash at $10 per share all 100,000 shares of the
outstanding common stock of the Tedd Company. The total fair value of all identifiable net assets of Tedd was
$1,400,000. The only noncurrent asset is property with a fair value of $350,000. The consolidated balance sheet
of Naeder and its wholly owned subsidiary on June 30, 20X1, should report
23. Pinehollow acquired 80% of the outstanding stock of Stonebriar by issuing 80,000 shares of its $1 par value
stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs.
Prior to the transaction, the companies have the following balance sheets:
Assets
Pinehollow
Stonebriar
Cash
$ 150,000
$ 50,000
Accounts receivable
500,000
350,000
Inventory
900,000
600,000
Property, plant, and equipment (net)
1,850,000
900,000
Total assets
$3,400,000
$1,900,000
Liabilities and Stockholders’ Equity
Current liabilities
$ 300,000
$ 100,000
Bonds payable
1,000,000
600,000
Common stock ($1 par)
300,000
100,000
Paid-in capital in excess of par
800,000
900,000
Retained earnings
1,000,000
200,000
Total liabilities and equity
$3,400,000
$1,900,000
The fair values of Stonebriar’s inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. What is the amount of
goodwill that will be included in the consolidated balance sheet immediately following the acquisition?
24. Paro Company purchased 80% of the voting common stock of Sabon Company for $900,000. There are no
liabilities. The following book and fair values are available for Sabon:
Book Value
Fair Value
Current assets
$100,000
$200,000
Land and building
200,000
200,000
Machinery
300,000
600,000
Goodwill
100,000
?
The machinery will appear on the consolidated balance sheet at ____.
25. Pinehollow acquired 70% of the outstanding stock of Stonebriar by issuing 70,000 shares of its $1 par value
stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs.
Prior to the transaction, the companies have the following balance sheets:
Assets
Pinehollow
Stonebriar
Cash
$ 150,000
$ 50,000
Accounts receivable
500,000
350,000
Inventory
900,000
600,000
Property, plant, and equipment (net)
1,850,000
900,000
Total assets
$3,400,000
$1,900,000
Liabilities and Stockholders’ Equity
Current liabilities
$ 300,000
$ 100,000
Bonds payable
1,000,000
600,000
Common stock ($1 par)
300,000
100,000
Paid-in capital in excess of par
800,000
900,000
Retained earnings
1,000,000
200,000
Total liabilities and equity
$3,400,000
$1,900,000
The fair values of Stonebriar’s inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. What is the amount of the
noncontrolling interest that will be included in the consolidated balance sheet immediately after the acquisition?
26. How is the noncontrolling interest treated in the consolidated balance sheet?
27. Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1 par value
stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs.
Prior to the transaction, the companies have the following balance sheets:
Assets
Pinehollow
Stonebriar
Cash
$ 150,000
$ 50,000
Accounts receivable
500,000
350,000
Inventory
900,000
600,000
Property, plant, and equipment (net)
1,850,000
900,000
Total assets
$3,400,000
$1,900,000
Liabilities and Stockholders’ Equity
Current liabilities
$ 300,000
$ 100,000
Bonds payable
1,000,000
600,000
Common stock ($1 par)
300,000
100,000
Paid-in capital in excess of par
800,000
900,000
Retained earnings
1,000,000
200,000
Total liabilities and equity
$3,400,000
$1,900,000
The fair values of Stonebriar’s inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. What is the amount of
property, plant and equipment that will be included in the consolidated balance sheet immediately after the acquisition?
28. Pesto Company paid $10 per share to acquire 80% of Sauce Company’s 100,000 outstanding shares;
however the market price of the remaining shares was $8.50. The fair value of Sauce’s net assets at the time of
the acquisition was $850,000. In this case, where Pesto paid a premium to achieve control:
29. Pesto Company paid $8 per share to acquire 80% of Sauce Company’s 100,000 outstanding shares. The
fair value of Sauce’s net assets at the time of the acquisition was $850,000. In this case:
30. When a company purchases another company that has existing goodwill and the transaction is accounted for
as a stock acquisition, the goodwill should be treated in the following manner:
31. The SEC requires the use of push-down accounting in some specific situations. Push-down accounting
results in:
32. Supernova Company had the following summarized balance sheet on December 31 of the current year:
Assets
Accounts receivable
$ 350,000
Inventory
450,000
Property and plant (net)
600,000
Total
$1,400,000
Liabilities and Equity
Notes payable
$ 600,000
Common stock, $5 par
300,000
Paid-in capital in excess of par
400,000
Retained earnings
100,000
Total
$1,400,000
The fair value of the inventory and property and plant is $600,000 and $850,000, respectively.
Assume that Redstar Corporation exchanges 75,000 of its $3 par value shares of common stock, when the fair price is $20 per share, for 100% of the
common stock of Supernova Company. Redstar incurred acquisition costs of $5,000 and stock issuance costs of $5,000.
Required:
a.
What journal entries will Redstar Corporation record for the investment in Supernova and issuance of stock?
b.
Prepare a supporting value analysis and determination and distribution of excess schedule
c.
Prepare Redstar’s elimination and adjustment entry for the acquisition of Supernova.
Investment in Supernova (75,000 ´ $20)
1,500,000
Common Stock (75,000 x $3)
225,000
Paid-in Capital in Excess of Par
1,275,000
Acquisition Expense
5,000
Paid-in Capital in Excess of Par
5,000
Cash
10,000
Value Analysis
Company fair value
$1,500,000
$1,500,000
N/A
Fair value identifiable net assets *
1,200,000
1,200,000
Goodwill
$ 300,000
$ 300,000
33. Supernova Company had the following summarized balance sheet on December 31 of the current year:
Assets
Accounts receivable
$ 200,000
Inventory
450,000
Property and plant (net)
600,000
Goodwill
150,000
Total
$1,400,000
Liabilities and Equity
Notes payable
$ 600,000
Common stock, $5 par
300,000
Paid-in capital in excess of par
400,000
Retained earnings
100,000
Total
$1,400,000
The fair value of the inventory and property and plant is $600,000 and $850,000, respectively.
Assume that Redstar Corporation exchanges 75,000 of its $3 par value shares of common stock, when the fair price is $20 per share, for 100% of the
common stock of Supernova Company. Redstar incurred acquisition costs of $5,000 and stock issuance costs of $5,000.
Required:
a.
What journal entries will Redstar Corporation record for the investment in Supernova and issuance of stock?
b.
Prepare a supporting value analysis and determination and distribution of excess schedule
c.
Prepare Redstar’s elimination and adjustment entry for the acquisition of Supernova.
a.
Investment in Supernova (75,000 ´ $20)
1,500,000
Common Stock (75,000 x $3)
225,000
Paid-in Capital in Excess of Par
1,275,000
Acquisition Expense
5,000
Paid-in Capital in Excess of Par
5,000
Cash
10,000
Value Analysis
Company fair value
$1,500,000
$1,500,000
N/A
Fair value identifiable net assets *
1,050,000
1,050,000
Goodwill
$ 450,000
$ 450,000
34. On December 31, 20X1, Priority Company purchased 80% of the common stock of Subsidiary Company for
$1,550,000. On this date, Subsidiary had total owners’ equity of $650,000 (common stock $100,000; other paid-
in capital, $200,000; and retained earnings, $350,000). Any excess of cost over book value is due to the under
or overvaluation of certain assets and liabilities. Assets and liabilities with differences in book and fair values
are provided in the following table:
Book
Fair
Value
Value
Current assets
$500,000
$800,000
Accounts receivable
200,000
150,000
Inventory
800,000
800,000
Land
100,000
600,000
Buildings and equipment, net
700,000
900,000
Current liabilities
800,000
875,000
Bonds payable
850,000
930,000
Remaining excess, if any, is due to goodwill.
Required:
a.
Using the information above and on the separate worksheet, prepare a schedule to determine and distribute the excess of cost over book
value.
b.
Complete the Figure 2-3 worksheet for a consolidated balance sheet as of December 31, 20X1.
Figure 2-3
Trial Balance
Eliminations and
Priority
Sub.
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Assets:
Current Assets
425,000
500,000
Accounts Receivable
530,000
200,000
Inventory
1,600,000
800,000
Investment in Sub Co.
1,550,000
Land
225,000
100,000
Buildings and Equipment
400,000
700,000
Total
4,730,000
2,300,000
Liabilities and Equity:
Current Liabilities
2,100,000
800,000
Bonds Payable
1,000,000
850,000
Common Stock – P Co.
900,000
Paid-in Cap. in Excess – P Co.
670,000
Retained Earnings – P Co.
60,000
Common Stock – S Co.
100,000
Paid-in Cap. in Excess – S Co.
200,000
Retained Earnings – S Co.
350,000
NCI
Total
4,730,000
2,300,000
(continued)
Consolidated
Balance Sheet
Account Titles
NCI
Debit
Credit
Assets:
Current Assets
Accounts Receivable
Inventory
Investment in Sub Co.
Land
Buildings and Equipment
Total
Liabilities and Equity:
Current Liabilities
Bonds Payable
Common Stock – P Co.
Paid-in Cap. in Excess – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Paid-in Cap. in Excess – S Co
Retained Earnings – S Co.
NCI
Total
Determination and Distribution Schedule:
Fair Value
Fair value of subsidiary
$1,937,500
$1,550,000
$387,500
Less book value:
Common stock
$ 100,000
Paid-in capital in excess of par
200,000
Retained earnings
350,000
Total equity
$ 650,000
$ 650,000
$650,000
Interest Acquired
80%
20%
Book value
$ 520,000
$130,000
Excess of FV over BV
$1,287,500
$1,030,000
$257,500
Current assets
$ 300,000
Accounts receivable
(50,000)
Land
500,000
Buildings and equipment (net)
200,000
